Risk aversion is in vogue

The greenback surged broadly across board during the week as risks sell-off intensified with renewed debt worries in the eurozone. Greece CDS hit record high 3238 bp last week on concerns that Greece was unable to meet the terms of  bailout and this reignited fears about potential default and contagion to other peripheral states – Italy and Spain. The sudden resignation of Jurgen Stark from ECB board spooked investors further as it exposed the growing rift among the European leaders over the handling of the periphery debt. Stark has so far been known as a strong opponent to the endless buying of the peripheral bonds. Worries that the leaders are unable to contain the crisis has now set creditors restless as Finland is demanding collateral from Greece in return for fresh aid.

After data showed that unemployment remained doggedly high at 9.1% and NFP for Aug showed no new jobs creation,  Barack Obama unveiled a U$449bn job stimulus package on Thursday which included tax cuts and tax credits among other things. However, this failed to inspire hope. Bernanke’s speech was mostly an extension of the last Jackson Hole’s and continued to reinforce a gloomy economic outlook. The watchlist now is the Fed policy meeting on 20/21 Sep.

In Asia, China’s headline CPI moderated to +6.2% y/y in August from +6.5% in the prior month. But it’s still too early to say inflation has peaked and that China will soon abandon its tightening policy or resort to easing.

EUR/USD: The pairing has managed to stay afloat 1.40 for most of this year except for the occasional temporary dips. This support has come mainly from expectations of ECB rate hikes down the road. However, at ECB meeting last Thursday, Jean-Claude Trichet said “downside risks” to the region’s economy have intensified, and left the benchmark rate unchanged at 1.5%.  From previous hawkish to the now dovish tone, investors are now thinking that easing policy may soon follow suit and EUR is thus losing its carry appeal. Coupled with deepening worries in the eurozone debts, EUR/USD dived from 1.419 at start of the week to 1.3662 as the week closed, making it the 2^nd worst performing currency for the week after the swiss franc. This was the second consecutive week the common currency has fallen, and it chalked up 5.84% loss against the dollar during the last 2 weeks. Current developments at present look set for an acceleration in EUR downfall.


USD/CHF:After lower than expected CPI data, SNB announced on Tuesday a floor rate of EUR/CHF  at 1.2 and pledged to maintain this rate with "utmost determination". In addition, it warned that this rate is still high and if needed, will introduce further measures. CHF tumbled 9.48% against USD overnight (definitely a noteworthy stress scenario). As mentioned in my earlier post "CHF to peg?" , the desperate SNB is capable of doing anything, albeit at very high costs, to stem swissy gains. The historic move by SNB has changed swissy from a safe haven to de facto riskie overnight as it now tracks euro closely. EUR/CHF peg looks credible for now and well noted by market, and USD/CHF seems poised for upward move to test psychological 0.9 should sentiments deteriorate.

 Technicals:

EUR/USD dropped sharply to a 6-mth low 1.3626 last week, with a strong break of 1.3888 support. Initial bias remains on the downside in the near term for 100% projection of 1.48982 to 1.39682 from 1.45319 at 1.36019. Break will path the way to 161.8% projection at 1.3027, close to 1.3 psychological level. On the upside, 1.38363 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 1.40 psychological resistance and bring fall resumption.

USD/CHF: Clear break of consolidation zone 0.8 suggests that reversal from 0.72063 low is firmly underway. Remain bullish on this pair. Near-term support at 0.88 and if this falls through, 0.85 is eyed. However, remember that EUR/CHF trajectory is the key.

26-Aug-2011

It was quiet before Jackson Hole summit as investors awaited confirmation from Bernanke on QE3. However, market went topsy-turvy after Bernanke delayed easing talks and monetary policy to Sep FOMC meeting. The immediate response following this was a risk sell-off but market was quick to reverse course to a risk-on mode and currencies generally surged across board against the greenback. Swiss franc was the prominent exception and dived against USD, breaking out of the familiar range 0.7900/80 to reach a high of 0.8156 after the speech. This was likely to be fuelled by the risk sentiment as well as intervention fears by SNB to curb swissy's gains. There were rumours that Swiss banks would begin charging for franc deposits, after earlier measures by SNB to boost liquidity and lower ST i/r. On the other hand, commodity currencies AUD and NZD emerged as the biggest winners with the former gaining 1.42% while the latter 1.65% against USD during the day. AUD was strong after RBA Governor Steven's comments lowered speculation of a rate cut in the near term.

USD/CHF: Early indication of a strong break in psychological barrier 0.8 has confirmed the resumption of rebound from 0.70658 low on 9-Aug, and points to further upward bias as long as 0.78049 minor support holds. A break of the minor support indicates a temporary topping.

EUR/USD: Rangebound at 1.435/1.445  before the meeting. Inspite of the boost in risk sentiments thereafter, investors are still unwilling to test the barrier 1.45. Next week, investors likely to turn back attention to EUR debt problems especially after reports emerged on widening credit spreads in Greek bonds. Short-term outlook remains neutral, tied at 1.43/1.45. Otherwise break of 1.43 signals start of bearish trend.

USD/SGD: Consolidated at 1.20191/1.21149. Outlook remains biased downwards if 1.205 support turns resistance.

NZD/USD: It has been an upward trend for the pairing for the day even before Jackson Hole, but staged an even more impressive surge after the meeting to test 0.84 resistance. A break here is necessary to confirm resumption of rebound from 0.7963 low on 9-Aug to start a bullish trend.

21 Aug- 2011 Mid-Day

Midway through the asian session and currencies were confined to a tight range as market remained cautious before the broader theme plays out towards mid/end week.

EUR/USD: Profit taking sent this pair retracing back moderately to 1.43643 after openining at 1.43928. Moving into european session, it seems that the pair is poised for another downside as european bourses got off with a bad start.

AUD/USD: Intraday high of 1.044 was met with strong selling interest and the aussie soon pared gains to dip below 1.0384.

NZD/USD: Movement mirrored aud/usd, with intraday high 0.823 finding solid selling interest on dip in risk appetite.

USD/CHF: Reaction to this pair was quite muted. USD/CHF was consolidated in a tight trading range that extended from 0.78379-0.78745.

USD/JPY: Bounced up from friday's low of 75.931 to a high of 77.202 this morning and this was said to be due to buying by an US name on behalf of a Japanese institutional investor. But the currency pair met good selling by exporters and soon retreated back around 76.685/76.729 level. Overall trend in consolidation as market remained jittery on intervention fears.

 USD/SGD: Longs only managed to pull this up to 1.21124 before paring gains and consolidated at 1.209/1.21 level.

FX Weekly Brief - 19 Aug 2011 (Sell, Sell, Sell)

Market ended in another ugly week after the respite from the preceding week's turmoil. Risk sell-off resumed by mid week as global economic data continued to paint a gloomy outlook. According to Morgan Stanley, US and Europe are coming very close to a recession. Citigroup and JP Morgan also downgraded their forecasts on US growth outlook. Sentiments were boosted briefly immediately after Franco-German meeting as the leaders proposed a series of tax reforms aimed at achieving closer economic integration in the region. However, this was very short-lived as markets soon reversed course and resumed its downward trajectory when investors find that the summit lacked substance to soothe their fears about Europe debt problems. To add to all these, ECB said that it has extended a 7-Day lending facility of U$500m to a bank, and this was the first time since February that this facility was used. Concerns that there could be other banks awaiting ECB's help ignited worries about interbank liquidity.
Dow closed the week at 10,817.65 (-4%); S&P at 1,123.53 (down 4.7%) and Nasdaq was 7.15% lower at 2,341.84. In forex market, flows were seen moving back to safe havens swiss franc and the yen though gains were capped as investors held back due to concerns of official intervention. Gold managed to attach itself to the increase in risk aversion and continued to trend higher, topping 1,878, with no indication of a reversal in focus at present.

Coming next week, market will be watching Jackson Hole symposium closely on clues from Bernanke pointing to possibility of QE3. This will determine the fate of the US dollar. If QE3 materialises, and BoJ and SNB threaten further intervention, market will have to decide which will be the next best safe haven currency.

EUR/USD: Pulled back from intraday week high of 1.45162 at mid-week to close at 1.43928 for the week as investors digested softer than expected GDP data on eurozone which was compounded by disappointing outcome from Franco-German summit. Market seemed quite reluctant to buy anything above 1.44513 level whereas sub 1.426 was drawing strong buying interest as week closed.

Technicals: Supportive tone above 1.4176 but bias still tilted to the downside, particularly if it can't get above 1.44508 barrier. Below 1.4176 will see bears targeting 1.4102. Lift above 1.44508 will see bulls testing the next resistance at 1.45146.

Strategy: Jackson hole aside, next week calendar promised some events to change the short-term bearish EUR status quo, most notably German ZEW on Tuesday. Positive data or a better offered USD could see USD/EUR breaking the malaise at 1.44508 to test resistance 1.45146. However, any bullishness in this pair is likely to be capped given the fragile sentiment surrounding EUR debt problems and weakness in global economy. 1.46 is seen as too rich for this pair and likely to induce intraday profit taking to keep resistance in check.

EUR/USD daily (2-wk)

USD/CHF: After reaching a record low of 0.70658 on 8-Aug, activity for this pair was consolidated for the week as market traded cautiously, wary of SNB intervention. Even though a EUR/CHF peg scare has been put off temporarily, SNB promised further expansion of liquidity measures to stem the franc's advance.  Despite the risk selloff last week, market appeared unwilling to test anything below 0.78. Likewise, psychological barrier 0.8 was rarely broken, and if so, would be quick to attract subtantial selling interest to push price back to 0.785-0.795 range. There's an early sign that this pair is losing its safe haven appeal.

Technicals: Immediate support at 0.78, with key support at 0.73318 if risk aversion blows. Next to test would be the historic low of 0.70658. Strong resistance formed at 0.8, and if it breaks, 0.82 would be eyed, and could stage a start of USD/CHF rally.

Strategy: Given the fragile sentiment, USD/CHF is likely to trade heavy and 0.8 resistance probably would remain intact. A broad based USD selloff if QE3 were to come could see a convincing break below 0.78 to test the key support zone 0.73316, provided EUR rallies too. EUR/CHF should be the gauge for SNB intervention with 1.1 deemed as a dangerous zone.

USD/CHF daily (2-wk)

USD/JPY: With continuing diversification away from USD and CHF, JPY is being favoured as the popular choice for safe haven flows. Threats of intervention by BoJ managed to keep this pair more subdued. However, market was eager to test the limit and USD/JPY reached a historical low of 75.931 on 19-Aug. BoJ has said that it will discuss further measures to stem yen gains.

Technicals: Weekly USD/JPY chart pointed to bearishness in USD/JPY. 1^st resistance seen at 76.6, with 77 as the next key level. A failure to hit the first resistance will signal a downside momentum with 76.2 targeted as immediate support. If a convincing break below this is made, it will not be too adventurous to believe that the low of 75.931 would soon be broken.

Strategy: Much awaits what BoJ is likely to come up next. If it is slow to respond or can only to resort to old measures to prevent yen gains, bears would be happy to come back in stronger control to send prices dipping. Global uncertainty has a tendency to support flows to yen and if  Jackson-hole summit disappoints and selloff in USD ensues, BoJ may see its old attempt to curb its currency going into a black hole again. 75 is the psychological level to look out.

USD/JPY daily (2-wk)

NZD/USD: It swung with risk sentiment. It tested a high of 0.84241 briefly in mid-week but bulls were not able to hold onto sharp gains as bears quickly came in to send price falling to a week low of  0.81701 as equities futures pointed to the red.

Technicals: 1^st resistance formed at 0.84 as the pairing faces some strong selling interest above this point. Lift above this will inspire an upmove to 0.85.  Below the immediate support at 0.81077 will see bears targeting psychological level 0.8 with some consolidation expected and dip buyers come in before meeting 0.7963 (Aug 9 low).

Strategy: RBNZ will meet in coming week on inflation outlook. A hawkish tone is going to re-ignite interest in the kiwi to test the key resistance of 0.85 and possibly 0.88 level again if flows move out of USD on QE3 to the higher yielding currency. However, given the weakness in global economy, it’s quite unlikely that RBNZ will raise interest rate anytime soon. At present, given the poor market sentiment, risk-reward points to a potentially asymmetric reaction where NZD/USD is likely to be more sensitive on the downside than upside if we were to see another bout of negative economic news. This means NZD gains to be capped while facing potentially greater selloff in the downside.

NZD/USD daily (2-wk):

USD/SGD: The volatility in this pair is significantly lower than the rest as USD/SGD remained in a managed float regime. It started the week at 1.20489, briefly tested 1.2 as sentiment improved , before the equities-selloff sparked risk aversion to send it stalling just below 1.22 highs.

Technicals: Key resistance at 1.22 which sees substantial selling interest beyond this point.  A convincing break above this would see 1.225 targeted. If first resistance fails, a downward trajectory towards 1.2 will hold temporarily before a new low 1.19 forms.

Strategy. Downside bias of USD/SGD due to slight appreciation stance of MAS before the next policy meeting in October.  Broad based weakness of USD and the continuing erosion of its safe haven appeal if QE3 materialises, coupled with inflation concerns in the asian economics will reinforce the appreciation bias of SGD.  1.17 targeted with 1.2 barrier.  

USD/SGD daily (2-wk)

 

FX Brief - 16 Aug 2011 : Risk off as worries over eurozone troubles remained

After a week of roller coaster ride, market started this week in an upbeat mode as global equity and commodity markets rallied across the board and safe haven currencies were sold off. However, the relief in risk aversion were short-lived as today, softer than expected eurozone GDP data fed into EUR weakness and commodities currencies were taken a hit too. France-Germany meeting also failed to ease worries on the lingering euro zone troubles.

USD/CHF: The limelight CHF continued to weaken albeit at a gentler pace following last week massive selloff. Focus was on EUR/CHF peg and the talk was that SNB intended to floor the rate at 1.1 temporarily.  SNB had many desperate and futile attempts before to stem swissy advance. However, injecting liquidity and cutting rates to near zero all fell into black hole. A high franc was seen menacing to the swiss economy and SNB appeared ready to pay a high price to halt the spiraling currency. Whether this is a verbal threat or real risk, investors appeared bothered to some extent. 

After a record low of 0.70658 last week, USD/CHF staged a fiery reversal and shot up by 930 points to 0.7996, with most selling in CHF said to have come from EUR/CHF. Psychological barrier 0.8 remained intact as market sees some buying interest for the franc here, with USD/CHF retreating cautiously before finding support at 0.77715.  The brief recovery in CHF today took a sudden twist going into NY session when USD/CHF surged 145 points to reach a day’s high of 0.79388. All eyes on tomorrow (17-Aug) as Swiss cabinet meets and is expected to decide on how best to support the SNB’s efforts to stabilize the franc.

USD/EUR: EUR rally lost steam. The pair started the day at 1.4415 and headed southwards amid disappointing eurozone GDP data.  German Q2 GDP came in at 0.1% vs 0.5% expected while eurozone GDP came in at  0.2%Q/Q and  1.7%Y/Y vs 0.3%Q/Q and 1.8%Y/Y expected.  Strong Spanish and Greek bond auctions failed to offer much support as market stayed focus on the economic problem. The pair gathered some strength following into NY session just before Sarkozy-Merkel  press conference; it was testing  1.45 resistance momentarily as the leaders promised tax reforms to achieve closer economic cooperation in the region. But USD/EUR soon came off from its day high of 1.44708 to trade at 1.4391 at the point of writting.

USD/JPY: The day trade was confined to a range of  76.63-76.92. Despite the reversal in bear market late last week, USD/JPY was spared the volatility compared to other majors. CHF peg threat and US debt woes were sending safe haven flows to the yen which is now seen as a better insurance. Support for JPY provides some indication that concerns about the global economy and lingering Eurozone debt crisis and contagion into core economies remain.

S&P overstated US debt by U$2trillion

In its decision to downgrade US sovereign rating from AAA to AA+, S&P had overstated the US debt by a whopping U$2 trillion! I find this strange for the following reasons:
1. 2 trillion. How many zeros is that?? Have there been no controls in place during the process to spot such an obvious mistake?
2. Diffucult to imagine that such a blunder is allowed to happen especially when the decision on hand is a major one. Surely they could have anticipated the consquence of their downgrade?
3. The decision came soon after Obama's administration finally managed to overcome republican's protest to raise the nation debt ceiling.

Such doubts inevitably leave me wondering if there's any political conspiracy at play. And has there been any leak of the downgrade before it's made public?

CHF to peg?

Swissy lost 2.1% against the greenback during the week, with thursday chalking up the heftiest loss in history and yesterday SNB was suspected of propping up EUR/CHF again. The threat of pegging CHF to EUR seems to be weighing on swissy sentiments for now apart from its overvaluation. Indeed pegging seems to be a last but possible scenario as SNB had been trying desperately and futilely to halt the franc's advance. Pegging would mean SNB has to give up control of monetary policy to ECB to certain extent. What rate it will be pegged and how this will be carried out technically we do not know. But one thing for sure is that the consequence for long chf traders would be dire as chf is considered severely overvalued for now. Or maybe this is just another verbal threat?
The swiss economy is showing signs of slowing growth and the continual strength of franc is detrimental to the economy. Past intervention of injecting liquidity and lowering short term interest rates to curb the franc's strength has proven to be hopelessly futile. SNB has become really desperate as market sentiment continues to deteriorate and draw flows in support of the safe haven currency. And a desperate man is capable of doing anything. Even a one time move of a temporary peg if materialised is enough to damage the franc safe haven status. Even if pegging doesn't materialise, investors are now taking in this threat ; upside for CHF can be limited while any downside will be swift and possibly disastrous.
CHF will continue to show extreme volatility in the short term. There's still considerable interest for the safe haven ccy despite the threat. I think if USD/CHF breaks past the psychological resistance of  0.8, buying interest will come in again. Take profit soon. My thought is that the desperate SNB seems ready to pay the price for a temporary peg to 'punish' the ccy speculators and it's too risky to hold CHF overnight.

summary - 11 Aug

The winner of all for 10 Aug has to be JPY. Repeated threats of intervention by SNB is driving safe haven flows to JPY. Impressive gains made for those shorting USD/JPY during the day. Now as I write this USD/JPY is heading up with some force. But I think this is short lived given the poor sentiment in market.

Gold advance seems unabated. And already surpassed 1800 level as I watched TV news of even retail investors claiming to want to buy gold to preserve asset value. In fact, it appears gold is a better safe haven asset than any other currencies. And it wouldn't be subject to intervention, so its continual path upwards offers a lot more potential. I believe 2000 would soon be reached.

NZD/USD: support 0.81; resistance 0.84 for next day. My prediction.
USD/SGD: am looking to sell at 1.225 tomorrow.
EUR/USD: Support established at 1.44 past few days. More downside to come for this pair on upcoming Italy's austerity package approval. Remember the greece drama in Jun? I'm afraid it'll be a deju vu.

Shadows of depression..

Plunge, Tumble, Dive, gloabal equities bloodbath, volatility spikes safe haven currencies soar.. Such are the terms that perfectly descibed market sentiments in past few days. US sovereign rating downgrade by S&P from AAA to AA+ on seemingly unsustainable debt level and poor economic outlook, combined with worsening debt woes in EUR region sent shivers in market. FOMC outlook yesterday provided brief relief to market but not because confidence in economy increased. FOMC painted a gloomy picture to economy, interest rates to continue remain low. So there's really no reason why stocks posted impressive gains after this, and the only reason I can think is that market is correcting an overreaction?
In anyway, here's how currencies fared:

	SGD	NZD	AUD	EUR	JPY	CHF	XAU	USOIL
8/10/11	1.21054	0.83527	1.03548	1.43538	77.029	0.72427	1754.1	81.35
8/9/11	1.20809	0.83657	1.03485	1.43731	76.945	0.72063	1740.1	81.83
8/8/11	1.22228	0.8204	1.0186	1.41753	77.739	0.7548	1719.1	80.7
8/5/11	1.2149	0.84385	1.04638	1.42809	78.419	0.76535	1660.1	87.03
8/4/11	1.22367	0.83593	1.0463	1.4089	78.875	0.76339	1646.2	86.35
8/3/11	1.20482	0.8632	1.07515	1.43208	77.04	0.77008	1661.4	91.9
8/2/11	1.20561	0.86615	1.07772	1.42004	77.103	0.76202	1660.8	93.24
8/1/11	1.20089	0.87615	1.09687	1.42488	77.199	0.7834	1619.3	95.03
7/29/11	1.20322	0.87885	1.09854	1.43712	76.886	0.787	1625.7	95.9
7/28/11	1.20144	0.87095	1.10006	1.43325	77.651	0.80109	1615.7	97.15

	SGD	NZD	AUD	EUR	JPY	CHF	XAU	USOIL
8/10/11	0.20%	-0.16%	0.06%	-0.13%	0.11%	0.51%	0.80%	-0.59%
8/9/11	-1.16%	1.97%	1.60%	1.40%	-1.02%	-4.53%	1.22%	1.40%
8/8/11	0.61%	-2.78%	-2.65%	-0.74%	-0.87%	-1.38%	3.56%	-7.27%
8/5/11	-0.72%	0.95%	0.01%	1.36%	-0.58%	0.26%	0.84%	0.79%
8/4/11	1.56%	-3.16%	-2.68%	-1.62%	2.38%	-0.87%	-0.91%	-6.04%
8/3/11	-0.07%	-0.34%	-0.24%	0.85%	-0.08%	1.06%	0.04%	-1.44%
8/2/11	0.39%	-1.14%	-1.75%	-0.34%	-0.12%	-2.73%	2.56%	-1.88%
8/1/11	-0.19%	-0.31%	-0.15%	-0.85%	0.41%	-0.46%	-0.40%	-0.91%
7/29/11	0.15%	0.91%	-0.14%	0.27%	-0.99%	-1.76%	0.62%	-1.29%

Immediate reaction after FOMC meeting:

	SGD	NZD	AUD	EUR	JPY	CHF	XAU	USOIL
Before	1.22232	0.80736	1.0008	1.42285	77.119	0.74959	1752.1	77.38
After	1.20809	0.83657	1.03485	1.43731	76.945	0.72063	1740.07	81.83
Change	-1.16%	3.62%	3.40%	1.02%	-0.23%	-3.86%	-0.69%	5.75%

It's risk-taking following the meeting. Committment to keep US rates especially low boosted high yielding ccy like NZD and AUD. But the rally in ccy is short-lived. Asian Trades opened higher in equities, but reaction on ccy was subdued, and more like rangebound, and most erasing gains made just before NY close previously. What signal does FOMC send to boost market really? Actually nothing. Hence, it's not very surprising why the rally is so short.

My interpretation to all these economic developments:
-USD to gradually lose its safe haven appeal. Low rates, high debt, poor jobs data. There's no benefit to US on a strong dollar. In fact the weaker the better so that it can stay competitive in international trade.
- Sell USD against ccy like SGD, NZD, AUD.. Past few days have been an overreaction. With the LT appreciation trend in SGD, this presents a good buying opportunity. NZD ad AUD interests to remain strong due to yield advantage. But fragile sentiment now cannot be ignored.
-CHF is a safe ccy indeed. But in ST the current CHF level looks dangerously high, and ready for a correction. Even if it's not there's intervention risks.  Monitor and buy CHF on dip again as pessimistic global outlook tends to have exaggerated reaction on this pair.